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Executive Perks Under Fire
03/26/09
By: Paul R. Dorf, APD, CRI
Upper Saddle River, NJ - March 26, 2009 - Today's New York Times contained an article on executive perquisites (perks) entitled, "As Banks Flounder, the Perks Play On". This is not a new story, nor does it surprise anyone who has been involved in executive compensation. To the heart of the matter in this instance is the issue of a company continuing to pay executive perks, long after the executive has served as CEO at the company. Rolled up into severance agreements (usually concocted at the start of the CEO's career and not at the end) are the typical benefits: use of an office for life, health and welfare insurance for the executive's family for life, use of the corporate jet, a long-time consulting contract with the company, etc. The list goes on and on and, quite frankly, is only limited by the imagination and the collective conscience of the executive who asks and the Board who approves such perks.
Due to certain Securities and Exchange (SEC) rules, perks for some individuals need not be disclosed by the company, and therefore, stakeholders must be diligent in their efforts to unearth this information in the myriad SEC filings that public companies issue each year. Corporate governance watchdogs and shareholder services argue that this lack of transparency is to blame while the organizations themselves argue that they are simply following the SEC rules for disclosure. As with most issues, the best solution is usually somewhere in between these two extremes. Yes, companies are filing Form 4s and 8-ks which are available for public scrutiny, but unless you are a compensation expert or have the luxury of time to search through each and every filing, actually getting to the data can be cumbersome.
Admittedly, as recently as a year ago, the idea that a major financial institution would fail (insert favorite failed/merged/bailed-out bank here) was far from anyone's mind. However, perhaps some common-sense restraint should be applied going forward relative to the total compensation package. One of the basic principles we encourage at CRI is the use of a "circuit breaker" in any performance or deferred compensation plan. Just as a circuit breaker will save the appliances in your home if there’s an electrical short, performance and deferred compensation plans need to be “tripped” when the company that pays them has a “financial short.” We have seen many examples over the past few months of companies being obligated to pay bonuses and perks to executives of failed institutions – in some instances, the very same executives who drove that company to financial ruin. A circuit breaker would have stopped those payments and helped preserve valuable corporate assets at a time when they were needed most. Simply put, a bonus or executive perk should not contribute to the demise of a company.
The professionals at CRI can help the members of the Compensation Committee design and develop simple, competitive and clear compensation programs that are tailored to the individual needs of your organization and offer a clear line-of-sight between pay and the desired performance that shareholders seek. Please contact any of our professional consultants if you would like to discuss this or any other compensation issue with us.
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